Coping with rising school fees

School fees are a big expense and have risen well above the general rate of inflation in recent years.  Even if you took out savings and investment plans to cover the cost, there is likely to be a shortfall.  Sainsbury’s Finance estimates that parents borrowed some £37 million in personal loans last year alone to help pay for education. Of the £37 million, £12.25 million was used to pay for school fees, £13.56 million was used for university/college fees and £11.26 million for other educational costs.

Many families have financed education costs by increasing their mortgage.  This is usually the cheapest borrowing in terms of monthly repayments and allows you to spread the cost of school fees and higher education over a longer period than the 16 years it takes to educate a child.  Parents with several children can be paying school fees for 25 years – the full term of the typical mortgage.

The alternative is a personal loan where someone who is a good credit risk will pay around 8%.  Sainsbury’s estimates that just under 4,400 personal loans with an average value of around £8,500 were taken out to cover education costs.  Best buy is, surprise surprise, Sainsbury’s Finance which is offering a personal loan rate of 7.8% on loans of £7,500 to £14,999.  Monthly repayments on a £10,000 loan over five years work out at £200.54 and the total cost of the borrowing is £2,032. 

If you were to add £10,000 to your mortgage at an average rate of 4% it would cost an extra £400 a year or £33.33 a month in interest charges or £53.40 on a repayment basis – a lot less than the Sainsbury loan.  But over 25 years you would pay £10,000 in total interest charges – and that assumes a fixed rate of 4% for the full 25 years.  It could well work out much more expensive.

The latest government data reveals that between 2006 and 2008, households spent around £8.8 billion on education. However, this varied dramatically between homes in different regions. For example, those in London spent on average £770 a year, compared to £208 in the North West.   So we are talking about a lot of money here.  The further advance on your mortgage might seem the cheapest now but a personal loan paid off over a shorter period is a better bet.